A flexible budget is a budget that is a function of one or more levels of activities. The flexible budget is more intricate and useful than a normal budget, which remains at one amount regardless of the volume of the activities.
· What are the steps to developing a flexible budget?
The steps taken to develop a flexible budget are as follow: • Identify the activity index and the relevant range of activity. • Identify the variable costs, and determine the budgeted variable cost per unit of activity for ach cost. • Identify the fixed cost, and determine the budgeted amount for each cost. • Prepare the budget for selected increments of activity within the relevant range.
· What information is found on a flexible budget report?
Flexible budget reports are another type of internal reports. The flexible budget report is made up of two sections: • Production data for a selected activity index
• Cost data for variable and fixed costs.
This report provides a base for the evaluation of a manager’s performance in two different areas: production and cost control. This type of report is highly used in production and service departments.
· How is that information used to evaluate performance?
The flexible budget reacts to changes in activity, and it provides a more efficient tool for performance evaluation. It is driven by the expected cost behavior. Fixed factory overhead is the same no matter the activity level, and variable costs are a direct function of observed activity. When performance evaluation is based on a static budget, there is little incentive to drive sales and production above anticipated levels because increases in volume tend to produce more costs and unfavorable variances. The flexible budget-based performance evaluation provides a remedy for this phenomenon.
Kimmel, P., Weygandt, J., & Kieso, D. (2003). Essentials of...